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Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition
Richard B. McKenzie and Dwight R. Lee
Production costs in the short CHAPTER
8
run and long run
Perspective 8: The myth of the first-mover advantage
One of the most widely believed tenets in management theory and practice is the so-called “firstmover advantage.” That is, the first firm to market with a product will not only have the market
to itself, but will be able to fend off all latecomers and dominate the market for some time to
come.
Why? Theory holds that the first mover will achieve name recognition, realize some cost
advantage from economies of scale (thus lowering its long-term cost curves), develop brand
loyalty (hence, increasing its demand and/or lowering its elasticity of demand) and garner the
benefits of “network effects” (meaning that its demand will build with expanded consumption).
Beyond some ill-defined point, the first mover can expect its market expansion to reach the
“tipping point,” beyond which consumers will move to the dominant first mover simply because
everyone else is moving in that direction (Gladwell 2000).
The first mover, according to recent theory, can expect to have its market locked up
because consumers will be locked in, since consumers will face a high switching cost to move to
second and later comers (all concepts discussed in earlier chapters). Hence, investors should
flock to first movers because they will achieve a long-term stream of monopoly prices and
profits (see chapters 10 and 11).
Telling examples
The first-mover advantange is a nice theory, but it appears to be dead wrong as a generality –
according to management professors Gerald Tellis and Peter Golder whose extensive research is
reported in their important book: Will and Vision: How Late Comers Grow to Dominate Markets
(2002). They offer many telling examples, but consider this short list of firms that now dominate
their markets but who were hardly first movers:
●
Gillette is widely believed to have pioneered safety razors because it has dominated the
safety razor market for so long. But the concept of safety razors was proposed a century
before Gillette introduced its first razor. Moreover, several firms introduced safety razors
two decades before Gillette.
●
Hewlett-Packard (HP) is assumed to have created the first laser printer, since it has a
commanding share of laser printer sales. However, both Xerox and IBM commercialized
laser printers years before HP’s laser printers were built, using engines developed by
Canon, not HP.
●
Many people think that Netscape produced the first Internet browser and a few remember
that Mosaic hit the browser market years before Netscape. However, computer geeks
remember that Web browsers such as Viola, Erwise, and Midas inspired the development
of Mosaic at the University of Illinois.
●
Pampers now dominates the disposable diaper market, which is the reason many people
think Procter & Gamble was the first mover in that market in the mid-1960s. They have
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010
Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition
Richard B. McKenzie and Dwight R. Lee
2
forgotten that Chux diapers, produced by Johnson & Johnson, were on the market as
early as 1932.
●
Apple Computer hardly dominates the PC market today, but there remains the
assumption that Apple initially dominated the early market because it created the product
category. However, Micro Instrumentation & Telemetry Systems pioneered personal
computing with its Altair machine in 1975.
●
The first-mover advantage was hardly an advantage for the CPM personal computer
operating system or for the Mac operating system, both of which dominated the market in
their time before Microsoft took over with MS-DOS and later Windows (ten years after
the advent of CPM).
The case against the first-mover advantage that Tellis and Golder make goes beyond a
mountain of case histories that led them to their central conclusion: The first-mover advantage
never has been all that it is cracked up to be in any but six of the sixty-six industry groups they
studied during the 1990s.
Moreover, the failure rates of pioneers as of the start of the twenty-first century is quite
high – 64 percent for all industries studied. For the forty-two traditional industries studied, the
failure rate was 71 percent; for high-tech industries, 50 percent. And almost all pioneers
dominated their markets when sales were well below mass-market proportions. In 2000, the first
movers in the sixty-six industries had an average market share of only 6 percent.
Secret of market leadership
How did the first-mover advantage become the myth that it is? The answer is relatively simple.
Many researchers didn’t do their historical homework. They often assumed that market leaders
today developed their product’s category because the dominant firms themselves now claim to
be the pioneers and because the first-mover failures have been lost to a history that is all too
rarely studied with the care that Tellis and Golder have taken.
What is the secret of market leadership if first-mover advantage is not it? Tellis and
Golder (2002) draw an unsurprising old lesson that managers would be well advised to
remember:
● Market pioneers rarely endure as leaders. Most of them have low market shares or fail
completely. Actually, market pioneering is neither necessary nor sufficient for enduring
success.
● The real causes of enduring market leadership are vision and will. Enduring market
leaders have a revolutionary and inspiring vision of the mass market, and they exhibit an
indomitable will to realize that vision. They persist under adversity, innovate relentlessly,
commit financial resources, and leverage assets to realize their vision (2002, 41).
The bottom line
The so-called “first-mover advantage” has not been substantiated by research. There can, in fact,
be advantages to being a second and later mover.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010
Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition
Richard B. McKenzie and Dwight R. Lee
3
Review questions
1
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Why do business people believe that there is an advantage to being first to market?
Do people in your firm actually believe there is a first-mover advantage?
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010